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How Electric Cars Could Cripple the Oil Market

Lucy Nicholson

By Nick Cunningham, Oilprice.com

February 3, 2017

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A 2014-style oil price meltdown could occur again. Only this time, instead of a sudden surge of supply, the culprit will be the fast adoption of electric vehicles, which will cut into oil demand enough to cause prices to fall.

That prediction comes from Carbon Tracker, a think tank that has repeatedly warned about the prospect of fossil fuel “stranded assets,” due to the rise of clean energy and increasingly restrictive climate policy. In its latest report, Carbon Tracker envisions a scenario in which 2 million barrels per day of oil demand are erased by 2025 because of the penetration of EVs in the transportation sector.

Reducing global oil demand by 2 mb/d may not seem like much, but it is equivalent to the supply overhang that triggered the 2014 oil price meltdown. It does not take a massive discrepancy between supply and demand to crash prices. The report also cites the 10 percent loss in market share for the U.S. coal industry over the past half-decade, causing an utter collapse in the finances of most U.S. coal producers.

At the heart of the forecasts are when EVs will be cost-competitive with the internal-combustion engine, and how quickly consumers will make the switch. Carbon Tracker says that EVs will reach that threshold by 2020. And by 2025, EVs will make up about one-fifth of the entire vehicle market.

There have been a growing number of dire predictions for oil prices because of the rise of EVs. Bloomberg New Energy Finance laid down one of the earliest and boldest markers last year, detailing a scenario in which EVs eliminate 13 mb/d of oil demand by 2040, enough to keep prices permanently low. Carbon Tracker goes further, arguing that oil demand could drop by a steeper 16 mb/d over that time period.

The oil industry has more modest figures. BP says it’s possible that EVs kill off 1.2 mb/d of oil demand by 2035. The Paris-based International Energy Agency (IEA) is similarly unimpressed, expecting EVs to only displace 1.3 mb/d of oil demand, while still expecting overall demand to rise because of demand in other non-transportation sectors – freight, aviation and petrochemicals.

A Royal Dutch Shell official recently hinted that his company was more concerned, suggesting that oil demand might even peak within the next five years. However, aside from the company’s substantial foray into natural gas, it is not backing away from oil in any significant way.

But Carbon Tracker thinks many of these analysts and companies are way off the mark. According to its forecast, total global oil demand could reach an absolute peak in 2020 and then plateau for the next decade.

While such a scenario is far from assured, it is something for which few companies and governments are preparing. Most energy forecasts have a business-as-usual assumption of steadily rising oil demand, stretching out for decades.

Based on this assumption, hundreds of billions of dollars are funneled into assets that might not be profitable if the world is taken by surprise by innovation in EVs and other clean energy technologies.

If oil demand adheres closer to the Carbon Tracker forecast, it would almost certainly cause another downturn in prices, only this time it would be permanent. EVs would only continue to gain market share over time, forcing oil into permanent decline. The “peak oil” conversation is now decidedly about when the world will hit peak oil demand, rather than peak supply.

Again, EVs do not have to capture 100 percent of the market to cause a financial crisis in the oil industry. Carbon Tracker cites the 10 percent threshold as key. A “10% shift in market share can be crippling for incumbents,” the report says. That threshold could very well be reached within a decade.

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